AFP Exam 2 — CSI Applied Financial Planning Cheat Sheet

This page is an independent review aid for candidates preparing for the Canadian Securities Institute CSI Applied Financial Planning (AFP®) Exam 2, exam code AFP Exam 2. Use it after reading the official material and before doing topic drills, mock exams, and detailed explanations.

For fast review:

1. Start with the case workflow so you do not jump to product recommendations too early.
2. Review the planning-domain tables for quick recall.
3. Use the trap lists to find weak spots.
4. Practise with original practice questions and a question bank immediately after reviewing each topic.
5. Build an error log that separates knowledge gaps from case-reading mistakes.

Treat current Canadian Securities Institute materials and the exam case facts as the authority for rates, limits, definitions, assumptions, and any legislative detail.

    flowchart TD
	    A[Client facts] --> B[Goals and constraints]
	    B --> C[Quantify gaps]
	    C --> D[Rank by urgency and impact]
	    D --> E[Select strategy]
	    E --> F[Explain trade-offs]
	    F --> G[Implementation steps]
	    G --> H[Review triggers]

Before You Calculate

Check:

• Is the question asking for annual, monthly, or lump-sum amount?
• Are returns nominal or real?
• Are cash flows before tax or after tax?
• Is inflation included in the payment or return?
• Are contributions made at the beginning or end of the period?
• Is the client accumulating capital or drawing it down?
• Are case assumptions provided that override general assumptions?

Common Calculation Errors

Registered plan comparison

For exam calculations, use the tax rates, contribution limits, and plan limits provided in the case or exam materials. Current statutory limits and thresholds can change.

Account location decision rules

Retirement decision table

Retirement traps

• Treating retirement as a single date instead of a multi-stage cash-flow plan.
• Ignoring inflation on expenses but not on income.
• Forgetting tax on RRSP/RRIF withdrawals.
• Overlooking survivor income after first death.
• Assuming the higher-return portfolio is better without testing sequence-of-returns risk.
• Ignoring health, long-term care, and housing changes.

Retirement Planning Cheat Sheet

Retirement planning is a cash-flow and risk-management exercise, not just an account-balance exercise.

Retirement Planning Inputs

Retirement Income Sources

Retirement Risks

Retirement Planning Traps

• Using a single average return and ignoring bad early-retirement returns.
• Ignoring inflation because the client’s current spending seems manageable.
• Projecting gross retirement income rather than after-tax spendable income.
• Treating all retirement accounts as interchangeable.
• Forgetting that withdrawals from different accounts can have different tax and benefit effects.
• Recommending full de-risking without considering longevity and inflation risk.

Investment product distinctions

Fixed income rules

Portfolio recommendation traps

• Do not recommend equities for money needed soon unless the case supports risk.
• Do not use past performance as the main rationale.
• Do not ignore taxes when moving non-registered holdings.
• Rebalancing can create taxable gains in non-registered accounts.
• Concentrated employer stock creates both employment and investment risk.
• A client’s stated risk tolerance may conflict with their behaviour or goal capacity.

Investment Planning Cheat Sheet

Investment planning connects return requirements with risk tolerance, risk capacity, liquidity, tax, and time horizon.

Risk Profile: Tolerance vs Capacity vs Required Return

A client may have high tolerance but low capacity, or low tolerance but high capacity. The recommendation must respect both.

Asset Class Review

Bond and Interest Rate Basics

More duration generally means more interest-rate sensitivity. Credit risk is separate from interest-rate risk.

Portfolio Construction Rules

• Align the asset mix with the client’s goal, not only their age.
• Diversification reduces unsystematic risk but does not eliminate market risk.
• Rebalancing controls drift; it does not guarantee profit.
• Concentrated employer stock creates both investment and employment-risk concentration.
• Taxable account turnover can create tax costs.
• Liquidity needs should be funded with suitable short-term assets, not volatile long-term holdings.
• Behavioural risk matters: a theoretically optimal portfolio may fail if the client abandons it.

Suitability-Style Recommendation Filter

Before choosing an investment, test:

1. Objective — income, growth, preservation, liquidity, tax efficiency?
2. Time horizon — short, medium, long?
3. Risk tolerance and capacity — can and will the client tolerate volatility?
4. Liquidity — can the client access funds when needed?
5. Tax status — registered or non-registered? income type?
6. Costs — fees, spreads, commissions, tax costs, penalties?
7. Complexity — does the client understand the product?
8. Concentration — does it overexpose the client to one issuer, sector, currency, or employer?

Life insurance selection

Insurance taxation and ownership traps

• Confirm policy owner, life insured, beneficiary, and premium payer.
• Employer-paid disability benefits are often taxed differently than employee-paid personally owned coverage.
• Corporate-owned insurance can create business, tax, and estate implications; avoid casual recommendations without analysis.
• Creditor insurance may decline with debt and may be less flexible than individual coverage.
• Beneficiary designations must coordinate with wills and family law considerations.

Insurance and Risk Management Cheat Sheet

Insurance is appropriate when the financial impact of a risk is too large to self-insure and the risk can be transferred at a reasonable cost.

Risk Management Process

1. Identify the risk — death, disability, illness, property loss, liability, long-term care, business interruption.
2. Estimate financial impact — income lost, debts, care costs, taxes, liquidity need.
3. Check existing coverage — employer plans, personal policies, group benefits, exclusions.
4. Choose a strategy — avoid, reduce, retain, or transfer risk.
5. Match product to need — term, permanent, disability, critical illness, liability, etc.
6. Review regularly — life events change coverage needs.

Life Insurance Needs

Term vs Permanent Life Insurance

Disability and Critical Illness

Insurance Traps

• Recommending life insurance when the real risk is disability.
• Ignoring employer group coverage limitations.
• Failing to match insurance duration to need duration.
• Overlooking tax treatment of premiums and benefits.
• Assuming a client can self-insure because they have assets, without checking liquidity and dependants.
• Not reviewing beneficiary designations after marriage, separation, children, or death.

Estate tax logic in planning cases

Estate traps

• A will does not control assets that pass by valid beneficiary designation or survivorship.
• Joint ownership added for convenience can create unintended beneficial ownership disputes.
• Naming a minor directly can complicate administration.
• Equal division is not always equitable if assets have different tax liabilities.
• Executor choice should consider competence, neutrality, location, age, and workload.
• Estate planning recommendations often require legal advice; identify referral points.

Estate Planning Cheat Sheet

Estate planning is about control, tax, liquidity, family protection, incapacity planning, and efficient transfer.

Core Estate Documents and Tools

Estate Planning Issues to Spot

Deemed Disposition and Liquidity

On death, many assets may be treated for tax purposes as if disposed of, unless a rollover or other rule applies. The planning issue is often liquidity: will the estate have enough cash to pay taxes, debts, and administration costs without a forced sale?

Estate Planning Traps

• Assuming probate/estate administration rules are identical across provinces.
• Forgetting that beneficiary designations must be coordinated with the will.
• Ignoring tax on registered assets at death.
• Not planning for incapacity.
• Equalizing asset values without considering tax cost.
• Leaving illiquid assets to multiple beneficiaries without a dispute-resolution plan.
• Naming beneficiaries without considering age, capacity, creditor risk, or relationship changes.

Common AFP Exam 2 Mistakes

• Recommending an investment product before completing KYC-style client analysis.
• Treating risk tolerance and risk capacity as the same thing.
• Ignoring tax treatment when comparing accounts or income sources.
• Using pre-tax cash flow when the question asks for after-tax affordability.
• Recommending long-term locking-in of funds when the client has short-term liquidity needs.
• Missing the spouse/partner, dependant, or beneficiary implications.
• Assuming a will controls assets with named beneficiaries.
• Forgetting that estate, tax, and family-law outcomes can vary by province and by current law.
• Memorizing contribution limits or rates without checking the case-provided assumptions.
• Choosing the “best product” instead of the best planning recommendation.

Quick Case Triage Checklist

Registered and Tax-Advantaged Account Review

Tax-Efficient Investment Placement

Tax Planning Traps

• Choosing an RRSP contribution solely because the client is in a high bracket without checking cash flow and future withdrawal impact.
• Treating TFSA contributions like deductible contributions.
• Forgetting that non-registered investments can create annual taxable income even if the client does not need cash.
• Ignoring capital gains tax when selling assets to fund a recommendation.
• Assuming spouses can simply transfer income or capital without tax rules applying.
• Ignoring the effect of taxable income on income-tested benefits or credits.
• Forgetting provincial differences where the case requires them.

Debt Repayment vs Investing

Compare:

• After-tax expected investment return.
• Guaranteed interest saved by debt repayment.
• Liquidity impact.
• Risk of job loss or income reduction.
• Tax deductibility, if applicable.
• Psychological and behavioural benefits.
• Opportunity cost of missing employer matching or registered-plan advantages.

Cash-Flow Traps

• Treating gross salary as spendable income.
• Ignoring irregular expenses: property tax, insurance, repairs, tuition, professional dues.
• Not separating fixed vs discretionary spending.
• Assuming a client can increase savings without changing spending.
• Ignoring emergency liquidity when accelerating debt repayment.

Ethical Decision Filter

Ask:

1. Is the recommendation in the client’s interest?
2. Are the relevant facts complete and current?
3. Have risks, costs, and conflicts been clearly explained?
4. Is the recommendation suitable for the stated goal and constraints?
5. Is specialized advice required?
6. Would the documentation support the decision later?

Recommendation Ranking

When multiple answers seem plausible, rank them this way: